How does the reverse auction software work

How does a Dutch reverse auction (DRA) work?

Published on December 7th, 2018

The Dutch reverse auction, short: DRA, was originally developed successfully in the Netherlands for selling tulips and is still used today. The original idea of ​​selling the tulips as quickly as possible for the best price was also adopted for shopping over time. The DRA is used nowadays when purchasing for areas that are less competitive.

Better cost prices in purchasing through auctions

Everyone has heard of the auction of flowers in the Netherlands. Loads of tulips and other garden beauties are auctioned at the push of a button. These Dutch Auction and other varieties are also available in the Purchasing.

The negotiation platform Promitea will be the well-known with Release 2.0 in December 2016 English reverse auction expand by two new auction types for purchasing. Except the classic English reverse auction (ERA) the buyer is now offered two ticker promotions: the Dutch reverse auction (DRA) and the Japanese reverse auction (JRA).

Both of the new phase types will be compatible with all of today's phase types

  • Information gathering (RFI),
  • Call for tenders (RFQ) and
  • Auction (ERA)

can be combined and used consistently. A Purchasing project can always be put together from several different phases.

The Ticker auctions are often used when the competitive situation is low or in a monopoly situation. These auction types are therefore especially suitable for scenarios with a very small number of suppliers. The core of the ticker auctions lies in the confidentiality of the information about the competitive situation and a limited fixed period for the submission of bids and decisions.

How does a Dutch reverse auction (DRA) work?

The DRA was originally made in the Netherlands for the Sale of tulips successfully developed and used to this day. The original idea of ​​selling the tulips as quickly as possible for the best price was also adopted for shopping over time. The DRA is used nowadays when purchasing for areas that are less competitive.

The DRA starts at a very, sometimes unrealistic, low price. The suppliers are given a fixed time interval (e.g. 30 seconds) in which they have to decide whether to accept the price. If none of the invited suppliers accepts this price, the price is automatically increased by one price step. The suppliers are then faced with the same decision again. This cycle continues until the first supplier accepts the price. Then the auction is over.

Since the suppliers have no information about their competitors, they are put under time pressure, as only the first to accept the price wins. There is no further chance or possibility of improvement.

How does a Japanese reverse auction (JRA) work?

The JRAimproves the principle of the English reverse auctions (ERA), where suppliers can react to each other.

Each supplier starts with the bid that he submitted in the previous phase (RFQ). The supplier is asked each time whether he accepts the given price. The supplier only has a short time window (e.g. 30 seconds) to make this decision. If the supplier accepts the price within this time, the price will then be further reduced. This, however, ends the similarity with the Dutch reverse auction, because the acceptance of the last price causes a further decrease in the price and the auction does not end automatically. This cycle repeats itself until the supplier no longer accepts the price within the specified time. Then the auction ends for him. For other suppliers, however, this continues.

The suppliers are not given any information about their competitors. This also includes information on how many suppliers are left. The supplier neither knows at which price who started, nor which price was accepted by whom or not. Only the buyer sees the complete picture. Since every supplier only "fights" with himself, he decides which price is still economically acceptable for him. This is completely independent of the competition.

Ticker auctions offer much more ...

The ticker auction processes described above are only one of the possible settings in the negotiation platform Promitea available to the buyer. The buyer can further:

  • set the price steps for the total price or just for individual items.
  • use the levels for the price steps.
  • run the DRA for each supplier individually.
  • enable the supplier to react to the initial acceptance in the DRA.
  • Set the same starting price for the suppliers in the JRA.

The choice of settings is up to the buyer and his strategy for how he would like to negotiate purchasing with the supplier.